Do you Yahoo?
Yahoo! is a puzzle (as an operating business in the United State), with a mystery (Yahoo! Japan is prospering while Yahoo! struggles) wrapped together with an enigma (Alibaba). (My apologies to Winston Churchill for mangling one of the great quotes of all time!) To value shares in Yahoo!, you have to estimate the value of its US operations, but that is only a small piece of the overall value, since it owns 35% of Yahoo! Japan and 24% of Alibaba. Neither holding is consolidated, which effectively means that the key operating numbers that you see in Yahoo's financial statements (revenues, operating income) will not reflect either of these holdings, though the net income may (as long as you look at the right measure).
The Puzzle
To value Yahoo!, I started with the parent company, a pioneer in the online search/advertising business that has long since been pushed to the sidelines by Google. The revenues have been declining at Yahoo! (US) over the last few years, going from $7.2 billion in 2008 to $4.68 billion in 2013. The much heralded ascension of Marissa Meyer to the top of the company has not resulted yet in a turnaround in revenues, though the company continued to be profitable, generating $587 million in 2013. I assume a nominal growth rate of 1% for the next 5 years for Yahoo!, increasing to 2.75% in year 10, I estimate a value of $5.85 billion for its operating assets, but adding its substantial cash balance of $5 billion (and netting out its debt of $1.59 billion, I derive a value of equity of $9.26 billion for the parent company.
My valuation of Yahoo! US equity
The Mystery
To value the 35% stake in Yahoo! Japan, I can take the easy way out and use the market value of its equity (since it is publicly traded) of $27.335 billion to derive a value of $9.57 billion for Yahoo!'s 35% stake. Estimating an intrinsic value for Yahoo! Japan, with a 3% growth rate in revenues for the next 5 years and much higher operating margin (40%) than Yahoo! US, yields an intrinsic value of $16.2 billion for the operating assets and $19.3 billion for its equity. That would generate a value of $6.76 billion for Yahoo's 35% stake in the company.
The Enigma
The final piece of the puzzle is Alibaba, in whom Yahoo! has a 24% stake. Unfortunately, we know very little about Alibaba at the moment, though we will find out more after they file a prospectus (perhaps later this month). Piecing together the information we have on the company, here is what we do know.
1. It is a fast growing, but growth is slowing: In the most recent year, Alibaba generated about $7.5 billion in revenues, up about 60% from the prior year's revenues. That growth rate is down from the 75% growth in the prior year.
2. It is a very profitable company: The company generates exceptional profit margins, with net income estimated to be about $3.375 billion in the trailing twelve months, translating into a net profit margin of 45%.
3. It is primarily an advertising company: While some have compared Alibaba to Amazon, it is not a retail company. It is primarily an advertising company, which explains its high profit margins. It is working on creating a more conventional retail arm but it is still a small portion of its overall revenues.
In the absence of information about the rest of the company (cash balance, balance sheet information, full details on expenses and taxes), we have three choices when it comes to valuing Alibaba. The first is to use the rumored IPO estimates of equity value, and these numbers range from $150 to $200 billion. The second is to use the revenue and net income numbers, in conjunction with estimates multiples obtained by looking at other companies in the business and adjusting for Alibaba's higher growth and profit margins. The table below lists PE and Price to Sales (which is a inconsistent multiple, but one we are stuck with since we have no debt and cash numbers) for sectors that may or may not match Alibaba's business model:
|
Sector |
PE |
Price/Sales |
|
Global advertising |
24.54 |
1.33 |
|
Global general retail |
16.91 |
0.55 |
|
Global internet retail |
80.99 |
3.12 |
|
US advertising |
37.64 |
1.35 |
|
US general retail |
16.08 |
0.60 |
|
US internet retail |
84.60 |
3.25 |
The range of values that you obtain, using these multiples for Yahoo!, is immense, from a low of $4.1 billion (using PS of Global general retail) to a high of $285.6 billion (using a PE ratio of US internet retailers). The bankers will undoubtedly gravitate towards the latter when in the Alibaba roadshow. The third approach is to do a very rudimentary intrinsic valuation with the limited information we have. Using a revenue growth rate of 30% (which still generated revenues of $52 billion in year 10) and an operating margin of 35% (which is much lower than their existing margin but higher than those posted by Facebook (30%) and Google (25%)), I estimate an intrinsic value of $146.5 billion for the equity.
My tentative valuation of Alibaba
The Bottom line
Valuing shares in Yahoo! requires us to bring the puzzle,
the mystery and enigma together into an aggregated value. The estimates we get
for value per share for Yahoo vary, depending on how we estimate the values of
Yahoo! Japan and Alibaba.
|
|
Yahoo! US |
+ 35% Yahoo Japan |
+ 24% of Alibaba
Equity |
- Value of Yahoo! Options |
Value of Yahoo! Equity |
Value per share |
|
All
intrinsic |
$9,264.00 |
$6,756.00 |
$35,165.00 |
$404.00 |
$50,781 |
$50.31 |
|
Yahoo!
US value + Yahoo! Japan Price + Alibaba IPO estd value |
$9,264.00 |
$9,567.00 |
$36,000.00 |
$404.00 |
$54,427 |
$53.92 |
|
Yahoo!
US value + Yahoo! Japan Price + Alibaba Rel Value |
$9,264.00 |
$9,567.00 |
$19,877.00 |
$404.00 |
$38,304 |
$37.95 |
The most pessimistic values are obtained, when we price Alibaba , based upon sector multiples, but one reason for that is that the sector multiples that we use are industry averages, unadjusted for Alibaba's higher growth and margins.